Overcoming Objections to Slicing Pie

Slicing Pie is a new way of thinking about very old problem. Many smart people suffer from fear of the new (Neophobia) and fear of change (Metathesiophobia). Slicing Pie requires people to not only consider something new, but also change the way they think about a problem that’s been around since the Paleolithic era when cave men carved bad equity agreements in stone (I think).

Traditional splits, as flawed as they are, feel safe and snugly to people who know how to work with them. Faced with Slicing Pie, these people will furl their brows, cross their arms, and begin to squirm in their seats. I’ve seen it all.

I’ve been facing Slicing Pie naysayers for years and I’ve become more adept at responding to them. If you or your partners are feeling skeptical about the model, below are some of the more common objections I’ve heard over the years and my attempt to address them. In my experience, objections are good things. Someone who raises objections is someone who is thinking through the model and trying to understand it. Once someone gets their head around the model they are more likely to object to traditional models rather than Slicing Pie. Many skeptics turn into fans.

Slicing Pie works. I’ve never found an equity problem that Slicing Pie won’t improve. Every bootstrapped startup in the world should use Slicing Pie!

If you are bootstrapping your startup, Slicing Pie will work for you, I promise. Do not split your equity another way, you will only be setting yourself up for failure!

My Partners Don’t Want to Use It

In my experience, there are three main reasons why someone would not want to use Slicing Pie.

The first reason is that they don’t fully understand how it works and why it’s fair. If this is the case, ask them to access the books, videos, games and articles on the subject or even set up a call with me. Education is the first step.

The second reason is that they understand it, but don’t want to keep track of their contributions. The Slicing Pie software makes this really easy. It takes minimal effort. So little effort, in fact, that if it’s still a deal breaker for them, they may not be the kind of person who can get stuff done.

The third reason is that they are the kind of person who is willing to benefit from an unfair split. Do not work with these people.

I Want to Maintain Control

Slicing Pie will give control to the person with the most at risk. This is how it should be. The person with the most to lose should be able to exert control over major decisions. It’s not really fair for someone with less at risk to exclude someone with more at risk. So, if you want to maintain control, be the person who contributes the most.

That being said, there are reasons why consolidating control to one person or group of people may be a necessity. The good news is that there are a number of structures that would allow consolidated control even—for a minority shareholder—while still providing fair financial benefits to other shareholders:

A Slicing Pie profit-sharing program would provide all the financial benefits to partners while consolidating control to select individuals.

A Slicing Pie vesting or buyback program can be set up to consolidate decision making to select individuals for a period of time.

Control is not a reason to implement an unfair split.

It’s Too Complicated, I Want Something Simple

Like many things in life, Slicing Pie is more complex than just guessing (which is how most equity splits are created). But, the basic principle is quite simple:

A person’s % share of the rewards should always equal that person’s % share of what’s put at risk to achieve those rewards.

The simplicity of Slicing Pie is what makes it work. Yes, you have to understand how to determine fair market value and yes, you have to keep track of what people are doing and how money is spent; but these are basic skills of any good business person. Real complexity comes in the form of legal disputes over fixed equity splits that always seem to come to a head when you’re trying to raise money or grow your company.

My Lawyer Said There Will Be Legal and Tax Issues

Of course there will be! Every company faces legal and tax issues no matter how it’s structured. Slicing Pie companies face the exact same issues and, like with any corporate structure, the issues need to be addressed.

Your lawyer may not have experience with Slicing Pie so it’s easier for them to steer you in a direction they are more familiar with, but that doesn’t mean there’s something wrong with Slicing Pie. It simply means your lawyer doesn’t want to learn about something new. Tell your lawyer that Slicing Pie has been successfully implemented all over the world and that I will personally spend some time with them to bring them up to speed on how it works. If they still don’t like it, find a new lawyer.

There’s Too Much Uncertainty

Some people think that dividing up equity in fixed chunks provides more certainty than a dynamic program like Slicing Pie. That is a misconception. The truth is that all equity splits are dynamic because they all change. No matter what founders do with their split in the beginning it’s bound to change as the mix of team members and investors and partners change (as is always the case). Slicing Pie simply gives you a fair, logical, automated way of managing this change. The alternative is to constantly renegotiate the fixed split. That’s why I call it the “Fix & Fight” model.

Nobody Likes Tracking Their Time

Me neither! Tracking time is kind of a hassle, but you and your team can determine how much granularity you want to track. You can track by hour or day or week or month or even year!

The increments need to be useful enough to capture differences in commitment. If you’re tracking by day, for instance, a person working one hour per day is clearly not as committed as a person working 14 hours a day. If your whole team is working full time, it may be less of an issue than a team with different levels of commitment.

Once people understand that their equity level depends in part on their level of time commitment, tracking becomes less of an issue. Additionally, good time records are an invaluable tool for managing employees and investor due diligence. Imagine being able to show a potential investor detailed records of how your company developed, who did what and how you spent money—it’s an incredible tool.

Productivity is More Important Than Hours On the Job

I agree, but most jobs in the non-startup world pay people for based on time, not on productivity.

Imagine being in a job where each week your manager would assess your productivity and only pay you what she thought you were worth that week. It would be an insane nightmare.

Slicing Pie reflects reality. In the non-startup world, people are expected to perform and are paid on a regular basis based on the expected performance. Really productive employees get bonuses or raises and unproductive get fired.

Some jobs are easy to tie to productivity. Sales or piecework, for instance, can be paid for performance. If your work is highly variable this is much harder and often impractical.

It’s Too Much Work

Tracking inputs does take a little discipline, but all good businesses require discipline. Slicing Pie sits on top of things most good businesses do anyway.

Most business track sales, investments, commissions and expenses anyway. Most people are comfortable with saving receipts and keeping track of out-of-pocket business expenses. Most people can manage their personal schedule and are in-tune with how they spend their time. If someone on your team thinks these things sound like too much work, maybe you should reconsider their participation.

Investors Won’t Like It

Professional investors want a clean, fair, logical, conflict-free cap table which is exactly what Slicing Pie delivers. It also delivers records of who is doing what and how money is spent- pure gold during due diligence.

If you’re advisors are telling you this, they don’t understand the model. Get them up to speed by sharing this book, pointing them to SlicingPie.com or connecting them with me personally. Business is constantly in flux and a good advisor should be informed on best practices. Slicing Pie is a significant improvement over traditional models. If your advisor doesn’t appreciate the model, please find a new advisor, or don’t take their advice and use Slicing Pie anyway.

Cherie Duncan

The link to Get them Gators seems to be broken – is there a way you could repost the details.

Download the free sample by signing up for my email list. It contains Get Them Gators.

-Mike

lordmj

How about:

– “The Slicing Pie model doesn’t capture the value I’m bringing to the table”
– “I’m the one raising the money so I should be able to name my terms rather than have them dictated to me by a pie slicer” (while haven’t at the time successfully pulled in a check yet)
– “I’m not willing to do the work that I do for the amount of equity the pie slicer is giving me, my minimum is X%”
– “the model will alienate top caliber people.”
– “the model is saying I’m getting 10% and person X is getting 30%. My value is 40% and Person X should only get 5%”

Been through a whirlwind trying to do Slicing Pie with previous partners.

Thanks for the note. These are all classic issues caused by traditional fixed-split thinking! None of these statements reflects the spirit of fairness, they reflect a person’s desire to predict and control the future which, of course, is impossible!

“doesn’t capture the value I bringing to the table” implies the person can accurately predict the future returns from his current effort. How much value did Steve Jobs create? A lot, but it’s impossible to quantify. Future value is unknowable. Fair market value, on the other hand, is knowable.

Money has a knowable value. It’s worth what it’s worth. People who put up all the money and pay everyone’s salary can do whatever they want because they will own 100%. If, however, other people contribute, everyone should get what they deserve. The one raising the money deserves a finder’s fee (in slices), but does not deserve to take advantage of everyone else.

Similarly, having a “minimum” implies a person is willing to benefit at someone else’s expense. This is someone to be avoided. Imagine 5 people playing Blackjack and the table has a $5 minimum, they decide to pool their money and they each bet $1 on the same hand. Each person deserves 20% of the winnings. If one person insists on getting 50% of the winnings because “that’s my minimum”, nobody else would want to play! Even if they did agree to play they are all getting taken advantage of, getting someone to agree to an unfair deal doesn’t mean its the right thing to do.

Also, a top-caliber person would be one who values fairness. No matter how skilled a person is, if he doesn’t value fairness he should be avoided. This is known as the “No Assh*le Rule”

The last statement is a recipe for disaster. It’s akin to telling a salaried employee to give his paycheck back to the company because his marketing campaign didn’t work. People who consistently under perform get fired. Slicing Pie allows for this, but when people contribute it’s part of the pie as long as they’re part of the company.

Slicing Pie provides a model for fairness based on a fair, logical framework. Many people are more comfortable with “old ways”. The traditional models for equity splits are just plain wrong. If you find yourself working with people who want to use fixed splits, keep looking for those who value fairness.

lordmj

I have a couple more good ones:

– The market we are operating in requires unique experience and relationships that only I have. The whole business is based around me and my business relationships so the slicing pie model is not appropriate for me.”

– “My role is so central to the business that I deserve no less than a 50% share, and the only things that warrant me having my share reduced are having someone on the team of comparable caliber to myself or a multi-million dollar investment. The slicing pie method can be used for other team members of lesser caliber to earn equity, but their earnings via the model should not effect my share. NO amount of hours that anyone else is contributing is enough value to warrant me taking a lesser share” – From a guy where based on the Slicing Pie spreadsheet forecast would get ~10% if we used the model.

– “Nobody is losing anything by me getting a 50% share, since the equity is based off value that I’m creating. Equity in the company with me having 50% will be worth a whole lot more than the companies equity would be worth in a company without me” – The same guy that would get ~10% if everything goes according to the Spreadsheet forecast

Slicing Pie isn’t designed to give you what you want, it’s designed to give you what you deserve. The best way to keep 50% of the equity is to provide 50% of the bets. I feel the same about my own businesses and don’t share equity at all, but I never ask for anyone else to contribute without getting paid. I took 100% of the risk and keep 100% of the equity. Now my business runs on cash flow and I enjoy regular distributions.

I, too, have ideas and a personal network that are specific to the type of business I’m in. However, the fact remains that I still have a fair market salary. I may think my idea is going to be worth millions, but if I can only earn $100,000 per year that’s all I’m putting at risk.

My feeling that my idea is going to be huge reflects my dream, not my risk. As founders, we often confuse our dreams for what we are putting at stake.

Cofounders have dreams too, and they express those dreams as promises. “I promise I will work hard and bring my vast network of buyers to the table,” for instance.

Using these measures as our base gives an equity equation that looks like this:

Promises ÷ Dreams

Not the kind of math that seems objective.

If you want to maintain at 50% share and still be fair, make a new plan. Invest more of your personal time and money upfront to generate cash flow and use that money to pay future participants. Use this spreadsheet to map out scenarios: http://slicingpie.com/slicing-pie-retrofitforecast-guide/

Don’t give yourself and unfair chunk upfront just because you think you’re valuable. You will be implying that the people who came to help are less valuable and less important. That’s not fair and it fosters ill-will among the team.

I totally understand where you’re coming from. I believe that Slicing Pie will give you the fairest split. If you don’t like the 10% that your current business plan gives you, make a new plan! Just be sure that it’s fair!

lordmj

Well just to be clear this isn’t me, it was from the person having objections. But it boils down to him feeling the Slicing Pie method presents a split that is inaccurate to what actually will happen in the business and market.

He felt based on his experience of how the market works, the relationships, networks, and jurisdictions involved in making the business work, that he knew which roles and credentials are more or less important to the actual execution and scaling of the business. From his point of view, he was already being fair and generous in regards to equity by asking for 50%. And said that experts in the market would agree with him.

“Don’t give yourself and unfair chunk upfront just because you think you’re valuable. You will be implying that the people who came to help are less valuable and less important. That’s not fair and it fosters ill-will among the team.”

From his perspective, that’s the reality of the business and the market. Professional credentials and roles matter, and certain roles are simply less important than others. And that someone that would be getting 30% with Slicing Pie getting 5% with his split isn’t being taken advantage of or being treated unfairly. And in fact the person getting the 5% in his split would be taking advantage of him (“I get a free 5% share!”) unless they are subject to a 6-12 month “prove yourself” volunteer period before they get any equity. He was extremely wary of anyone that wasn’t a major player in industry asking for or expecting equity.

If we excluded all other team members, and just left it as me and him, the forecast gives around an 80/20 split. He felt it was pretty ridiculous to talk about fairness when it allocates 80% equity to me and only 20% to him. Of course this was due to the fact that even with an hourly rate twice as high as mine, if he is working 5-10 hours a week on the startup and I’m working 80 hours a week, an 80/20 share would result.

Most equity splits are not really fair. When someone, who is used to old-fashioned thinking, is faced with what is actually fair, he may be disappointed. There is no shortage of experts who would agree wholeheartedly with this person, but that doesn’t make it fair.

You said that he feels “the Slicing Pie method presents a split that is inaccurate to what actually will happen in the business and market.” Nobody knows what will actually happen. That’s the core problem Slicing Pie solves.

The “reality” he observed is, in fact, the reality. But that doesn’t mean it’s fair. The startup world is full of unfair deals.. Early startup employees are routinely exploited. Law offices are full of founder dispute cases and their are plenty of examples of where a few people benefit at the expense of others.

It appears to me, that you are taking most of the actual risk in this situation and have more to lose. If it doesn’t work, you will have to absorb most of the actual losses.

If you and I went to Las Vegas and bet on Blackjack and I bet $2 and you bet $8 on the same hand (playing together), how should we split the winnings? According to him, I should get 80% of the winnings and you should get 20%. It should be obvious that that isn’t fair.

You are dealing with someone who is not only willing to benefit at your expense, but actually intends to benefit at your expense. Proceed with great caution!

lordmj

Well this relationship fell apart.

But a lot of the issue for him is the amount of work that would be on his part to make this business work. We were never able to have a straight conversation about at what point he would transition to working on the startup on a full time basis because he was so occupied about talking about his “value” and him “having the leverage.”

But lets assume for the moment that he will transition to full time once we raise $1 million. Lets assume he’s the one that raises that money. According to the Slicing pie forecast he would end up with 10-15% of the company if you factor in the investor finders fee. Lets say the investor gets 30% of the company. That results in him having 7 -10.5% of the company. Plus a $200k fair market salary. The pie freezes at that point.

This means that he is going to be scaling a business across multiple countries for 7-10.5% equity. That number just did not sound attractive to him. And even if he had agreed to use Slicing Pie, I would almost certainly expect him to demand that he get a bigger share at that point if he was the one raising the money since in his mind the results he produced (raising $1 million) plus the work effort ahead that will be on his shoulders would warrant that.

I agree that it would be nice to have a bigger chunk. But, when you consider his risk vs the cash investor there is a big difference. If he wants to have a bigger chunk he should invest his own $1,000,000 cash into the company and keep 100%.

If he doesn’t have the money he is going to have to give up some equity.

Most well-meaning, experienced advisers would strongly recommend that he maintains a larger share of the company even through a modest Series A. I personally agree that consolidated ownership during the early days is a great thing. But the fact remains that it’s still not fair to benefit at the expense of others.

Slicing Pie produces a fair, logical, objective result based on the reality of actual contributions. People may not like the results and may want more than their fair share which it totally understandable, but I don’t believe its the right thing to do.

lordmj

In this case it’s not that he thinks the investor getting 30% that would be the problem. It’s the split prior to the $1 million. In my case I was the original founder and he joined after I had spent a year or so working, because he though the market access he had and what I was building was compatible. But he was still holding down a full time job (80/hr weeks with 5-10 actually doing work on the startup). The 10% pre investment forecast was based on eliminating all contributions to the pie prior to us starting to work together. If we factored in the time spent prior to us working he would have even less of a share. A source of much friction and bitter fights.

Right, he wanted more than he deserved and he wanted to benefit at your expense. This is extremely common and many founders make this mistake.

Better to have the friction and fights now so you can part ways before things get complicated.

Slicing Pie is what it is, it doesn’t lie, it simply tells you the right number. If you believe the number then you believe that a person’s share of the equity should be based on that person’s share of the fair market value of the contributions.

If a person does not believe the numbers that Slicing Pie produces then that person probably thinks that fair market value isn’t relevant and prefers to think that predictions of the future are more logical and that bad business decisions are okay because startups are special, magical things that don’t have to follow rational thinking. Seriously, most equity splits are irrational and depend on future events.